Capital venturer

Erel Margalit blends business success with a new digital vision for Jerusalem.

By ROBERT SLATER

June 12, 2012 12:32

Erel Margalit 521.
(photo credit: RONEN ZVUL N / REUTERS)

IF A HOLLYWOOD PRODUCER ever chose to make a docudrama on Israel’s extraordinary
high-tech triumphs, 51-year-old Erel Margalit could easily star in the
film.

An athletic and youthful-looking former basketball player, an
articulate cheerleader for the start-up nation, he is a former kibbutznik who
grew into the country’s most successful venture capitalist. It was an odd career
choice for someone living in a socialist commune who, at age eight, tagged along
to watch his father work in the kibbutz dairy farm.

Because of Margalit
and other high-tech titans, Israel ranks second only to the United States in
high-tech accomplishments.

Margalit has spearheaded some of Israel’s most exciting
high-tech deals and is a driving force in the industry. He steered Qlik
Technologies to one of Wall Street’s largest initial public offerings in 2010
and oversaw the sale of Chromatis Networks to Lucent Technologies for $4.8
billion that same year.

Over nearly two decades, Jerusalem Venture
Partners (JVP) – founded by Margalit in 1993 – has invested in 90 startup firms,
most of them abroad. Nearly 10 times that number apply for support from JVP, but
Margalit is very picky. A short walk from Margalit’s office in the new JVP Media
Lab overlooking the Old City of Jerusalem is a collection of 16 JVP-funded
start-ups, some of the most thriving in the country. He monitors them closely,
meets their executives regularly, and offers advice.

The refurbished
office building on Hebron Road once housed a British Mandate era mint that
printed money. In effect, Margalit is still doing that.

For all his
achievements in the high risk, highly competitive, high-tech world, Margalit
maintains a modest low profile.

Over the course of an hour-long
conversation in his simple office, he explains how he lures investors and
assembles entrepreneurs for start-up work, but at no time does he mention his
single greatest coup: selling Chromatis Networks – at the time, the largest ever
sale of an Israeli company.

Ensconced in socialism

Nor does he mention
that in November 2004 Forbes Magazine selected him as the highest ranking
non-American venture capitalist on its Midas (Golden Touch) list, the annual
ranking of high-tech deal makers. Nor that in 2010 The Marker, the business
supplement of Haaretz, named him the number one venture capitalist in
Israel.

Margalit was born in 1961 on Kibbutz Na’an near Rehovot and
remained there until age eight – too early for him to play with computers, but
not too ensconced in socialism to dream of becoming a businessman. Moving with
his family to Detroit, Michigan, where his father taught Hebrew school, he honed
his athletic skills, playing junior-high school basketball, the only white
player on the team.

Unable to pronounce his last name, black team members
dubbed him Earl the Pearl after 1970s NBA star Earl Monroe.

On returning
to Israel, the Margalits settled in the northern town of Karmiel, and then moved
to Jerusalem. Margalit served in an elite combat unit during the Lebanon War in
1982. Then, after studying philosophy and English literature at the Hebrew
University, he still had no idea what kind of business career he wanted to
pursue, only that he wanted to found “a strong business,” he recalls.

At
age 24, he then moved to New York City where he earned a doctorate in philosophy
and logic at Columbia University. His doctoral thesis was on “The entrepreneur
as a leader in the historical process.” He says he loved studying. “I wanted to
quench my thirst for knowledge,” Margalit tells The Jerusalem Report. During his
studies, he worked for Moish Movers, hauling heavy furniture around Manhattan,
living in what he describes as a “shoebox” apartment.

Finally, upon his
return to Israel in 1990, his career choice dawned on him: he would make his new
hometown of Jerusalem into a high-tech capital. Not yet 30, he was appointed to
head the City Hall Department of Business Development under then Jerusalem Mayor
Teddy Kollek. He was in the ideal position to find local start-ups but the task
of enticing major high-tech firms from the United States to establish branches
in the Holy City had proven formidable to his predecessors. Known more for its
piety and ancient history than its high-tech achievements, Jerusalem had watched
disappointedly as the majors in high-tech gravitated toward Tel Aviv and
Herzliya.

Margalit’s notion of serving as a bridge between would-be
high-tech investors and wannabe start-up brainiacs came to him as he and Kollek
traveled by train between Maastricht and Amsterdam in The Netherlands in 1992.
Their goal was to lure a few European brainiacs to Israel.

Reading Robert
Reich’s 1991 book, The Work of Nations: Preparing Ourselves for 21st Century
Capitalism on the train, Margalit elicited this Reich takeaway: The money men
eager to contribute to high-tech have had trouble finding the right match with
potential start-ups. “The big capital was there,” says Margalit, “but those who
had it could not look at all the ideas that were out there. There were just too
many. These technology firms that we were trying to lure needed guidance and
money. I tried to supply both.” He managed to entice 70 technology firms
including Intel, Motorola and IBM to establish branches in the Holy
City.

New tone

When he left City Hall in 1993 after Kollek lost the
mayoral election to Ehud Olmert, Margalit shifted to the private sector, hoping
to entice Israelis to design and execute websites that would revolutionize the
Internet. “I wanted to find a competitive advantage for Israelis to come to
Jerusalem and start their own digital initiatives,” he says.

Margalit’s
decision to establish JVP in Jerusalem fulfilled a promise he had made to Kollek
to keep whatever high-tech firm he created in the city. It was one of
Jerusalem’s first venture capital enterprises. Setting a new tone and model for
Israeli venture capital investing, Margalit has used a handson approach not only
to fund high-tech firms but also to help build them, a combination that made JVP
unique.

Viewing himself as a nurturer, Margalit sits in on weekly
meetings with colleagues who oversee the start-ups. To Margalit, what Jerusalem
uniquely offered to high-tech start-ups were its storytellers, intellectuals,
and its religious zealots, who with their creative juices could ignite a new
passion and creativity that would enable these startups to bolster their
Internet-aimed content.

Yes, high-tech firms need engineers and software
geniuses, suggests Margalit, but they also need creative minds that understand
consumer desires. What Margalit was saying: Ignore these creative types at your
peril. Even the religious zealots can be creative. A philosophy student who
steered clear of studying business, Margalit learned to appreciate combining
disciplines such as engineering, philosophy and, of course, – storytelling.
While employees of JVP’s companies work behind closed doors, the usual secrecy
that prevails at other high-tech start-ups appears not to exist once the firm’s
doors open. Mingling freely in the modest lunchroom, hiking twice a year to the
Dead Sea, providing updates of their companies at regular “happy hours,” workers
feel more a sense of camaraderie than rivalry. Margalit’s start-ups have been
around long enough to conclude that, to one degree or another, staffers are high
achievers.

Seemingly out of thin air, a commercial restaurant called
Hasadna (The Workshop) and a music venue known as The Lab that now houses a
local branch of the Tel Avivbased Zappa Club have blossomed on the grounds of
the JVP compound, turning the once disused area into a new cultural and
entertainment nightspot that is helping to revitalize Jerusalem.

For
Margalit, fund-raising has always posed one of his greatest challenges. Once, in
2006, Margalit was seated at a New York City bar with former Sony entertainment
chief Michael Schulhof, hoping to lure big bucks from the Sony executive for any
of a number of Israeli companies. But, locked into a view that the Israeli
economy swirled around the Israel Defense Forces and its derivative high-tech
products and not the civilian high-tech industry, a highly cynical Schulhof at
first proved stubbornly resistant to Margalit’s overtures.

Maybe it was
the liquor. Maybe it was Margalit’s charm. Finally, Schulhof relented, asking:
“What kind of Israeli start-ups are you talking about?” Acknowledging that he
had no idea, Margalit suggested that they both write on a napkin the kind of
start-ups in which they would invest. As the ink on their napkins began to dry,
both men realized that they had nearly identical views: They had each described
a company that on short notice would provide brief movie scenes for websites
that required such items. Imagine a TV entertainment program wanting to show
what a dumb idea someone just had, when suddenly Jerry Seinfeld and George
Constanza pop up on a nearby TV screen in the program’s studio with George
shouting, “Boy, was that a dumb idea.”

Napkin scribbling

The result of
the napkin scribbling was JVP start-up AnyClip, which was founded in 2008 with
backing from Schulhof. Three years later, it secured a major deal with Universal
Studios to use favorite clips on the web taken from the film giant’s enormous
library. Two other JVP start-ups are Double Fusion, founded in 2004, that
inserts real ads into online games; and Qlipso, founded in 2007, which allows
users to share and comment on their online social video experience.

So
financially rewarding has Margalit’s JVP proven that he has turned to
philanthropy to implement his conviction that Israeli education, especially for
the poor, needs improvement. His program, JVPCommunity, works to bolster the
academic achievements of 3,000 underprivileged students in over a dozen
Jerusalem schools.

Convinced that leaders matter, as researched in his
doctoral thesis, and seeking a national stage for his views, Margalit dipped his
toes into political waters in April 2011, seeking to become the head of the
Labor Party. It seemed a long shot and just 10 days before the party primary, he
dropped out of the race and threw his support behind Knesset Member Isaac
Herzog, who subsequently lost the leadership contest.

Margalit offered no
public explanation for his departure from the Labor Party race but the brief
experience clearly whetted his appetite. He sounds enthusiastic about running
for the Knesset in the next elections scheduled for October 2013, hoping to
raise the consciousness of other politicians toward the high-tech
sector.

“Politics,” says Margalit, “is the only field in Israel that has
not shown an entrepreneurial spirit for the past 20 years. What I hope to do is
to inject into government the same spirit of innovation, daring, imagination,
working together, and doing things internationally that we have been able to do
privately.” It should not be surprising to find Margalit suggesting that such
private sector high-tech all-stars would make fine political leaders.

He
certainly appears to have himself in mind as one of them.

Though Margalit
and Jerusalem Mayor Nir Barkat may appear to be two peas in a pod – both are
about the same age, both were officers in the army and both became computer
entrepreneurs only to turn to politics – they are not, at least for the moment,
political rivals. Barkat says he wants only a career in municipal politics.
Margalit hopes one day to become prime minister.

Sites Of Interest

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